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Classification Of Overheads Based On Behavior

This classification is based on the behavior or variability of overheads. Such a classification of overheads is based on change in the amount of overheads with the change in output. According to this classification, there are four types of overheads:

1. Fixed Overheads
Fixed overheads are also called period costs or capacity costs. Fixed overheads are incurred for creating an output capacity of the concern for a fixed period of time. They are the costs which remain fixed or constant in total despite changes in the volume of production or sales. Fixed overheads remain fixed in total up to a certain level of activity which is known as relevant range of activity but fixed overheads per unit always vary with the production or sales volume in an opposite direction. For example, per unit fixed overheads decrease with an increase in the production or sales volume and vice verse. Examples of fixed overheads are rent, salaries, depreciation, interest and legal expenses.

2. Variable Overheads
Variable overheads are those type of overheads which vary positively with the production and sales volume. Hence, they vary directly in proportion to the volume. Variable overheads increase in total with the increase in volume and vice versa. They, however, remain constant in per unit. Examples of variable overheads are indirect materials, indirect wages and power expenses.

3. Semi-variable overheads
Semi-variable overheads are neither completely fixed nor variable. Therefore, they are also called semi-fixed costs. Semi-variable overheads comprise the quality of both the fixed and variable costs. They vary disproportionately with the change in the volume of output. They do not vary directly proportion to the volume. They are the mixed type of overheads. The semi-variable overheads increase with the increase in output units but not at the same rate. Telephone , electricity, repair and maintenance, heating, lighting, supervision and inspection, salesmen remuneration are some of the examples of semi-variable or semi-fixed overheads.

4. Step Fixed Overheads
Step fixed overheads remain fixed within a certain range of output level and jump up once the range of output level exceeds. Step fixed overheads remain constant for a given volume, but increase by another fixed amount the moment there is addition of volume, and keep on increasing by a fixed amount with the addition of volume. Hence, such overheads increase step by step according to the relevant range of output level. For example, a college bus driver is paid salary of $ 2500 a month which will remain constant until another bus is bought or hired. But as soon as the number of college bus increases, the salary cost will be increase by $2500 with every addition of such buses.